Arguing Over Arbitrability of an Arbitration Agreement: New Prime v. Oliveira and Its Potential Impact on the Transportation Industry

On October 3, 2018, the Supreme Court of the United States heard oral arguments in New Prime, Inc. v. Oliveira, a case which asks the Court to decide, as a matter of law, whether independent contractors are included within the scope of the “contracts of employment” exemption for workers engaged in interstate commerce under Section 1 of the Federal Arbitration Act (“FAA”). Under Section 1 of the FAA, such contracts of employment are exempted from the applicability of the FAA. While the Supreme Court has historically held in favor of enforcing arbitration agreements, the fact that the swing vote on these 5-4 decisions was usually Justice Anthony Kennedy, a sense of uncertainty looms over the fate of the FAA as it applies to contracts of transportation workers. More importantly, a decision either way in the case could have implications for thousands of workers who are employed in the transportation sector and also for the employers of an industry notorious for its nickname of “sweatshop on wheels.”

It is no secret that many truckers in the transportation sector are often misclassified as independent contractors rather than as employees. In reality though, they are treated as employees of one company in that they are not free to work for other companies, have little to no say over the hours they work, but have to bear the operational expenses of leasing a truck, all without receiving any of the traditional employment benefits. The Respondent in New Prime, Oliveira, was one such independent contractor who began working for New Prime, an interstate trucking company after an apprenticeship program with them. Relying on New Prime’s representations that becoming an independent contractor would be more lucrative, Oliveira signed an Independent Contractor agreement with them. The agreement contained an arbitration clause which required both parties to arbitrate any disputes. However, after facing the harsh realities of the “independent contractor” life, Oliveira sued New Prime for failure to pay minimum wages.  In response, New Prime moved to compel arbitration. Both the District Court for the District of Massachusetts and the U.S. Court of Appeals for the First Circuit found for Oliveira, with the Court of Appeals going as far as to conclude that all agreements establishing independent contractor relationships fall within the scope of “contract of employment” under Section 1 of the FAA. Consequently, the arbitration clause found in the agreement between Oliveira and New Prime became unenforceable under the FAA by virtue of the exemption under Section 1 for contracts of employment. New Prime then appealed to the Supreme Court.

Although the legal arguments advanced in the case are highly technical and relate to issues of statutory interpretation, this post will explain why painting all independent contractor agreements with the same brush and categorizing them under “contracts of employment” has policy implications that will go beyond the trucking industry.

In May 2017, a study by the U.S. Bureau of Labor Statistic found that there were nearly 10.6 million independent contractors in the economy in May 2017. 5% of such workers are hired by the transportation industry. Without the option to resort to arbitration, employers would be forced to resort to traditional forms of litigation for such workers, which is touted to be slower, more expensive and riddled with procedural complexities. Logistics companies such as New Prime utilize these arbitration clauses with built in class action waivers to fend themselves from allegations of misclassification of employees as independent contractors. Given that the cost savings to trucking companies from these arbitration clauses helps boost profits, a decision in New Prime that independent contractors are not bound by such arbitration clauses will inevitably drive up the costs of operating. This in turn, has the potential to push up the costs of the products moved through this industry, which includes everything from Amazon Prime deliveries to fresh produce delivered to supermarket chains. Such upward increases could be anywhere from 10 to 20 percent, particularly in light of other problems besetting the industry such as the massive shortage of truck drivers, increased demand for freight and the new mandate of electronic logging devices (ELD). These increased costs will be passed along to the consumer and the impact on the national economy could potentially be large.

Interestingly, the Customized Logistics and Delivery Association, which also represents the interests of independent contractors, filed an amicus brief in the Supreme Court arguing that including independent contractors within the scope of Section 1’s exemption would also harm the drivers by depriving them of the option to rely on arbitration and leaving them to the mercy of unpredictable juries. In the absence of an option to arbitrate, many independent contractors may also hesitate to bring claims to trial as the relatively nominal amount they seek may be outweighed by the costs of litigation.

One of the primary arguments raised by Oliveira and the amici who filed briefs supporting him in the Supreme Court is that a decision in favor of New Prime would encourage misclassification of employees as independent contractors and that what is a determination on the issue of arbitrability will in effect be a legitimization of misclassification. However there are two reasons why this fear may be overstated: First, the pre-emption of federal arbitration law for independent contractors does not necessarily mean that state law of arbitration will not apply; thus, even classifying all independent contractors under contracts of employment may not discourage misclassification or guarantee access to courts if there is an arbitration clause in the agreement. Second, there is also the possibility that a ruling in favor of New Prime could only mean something as innocuous as refusing to find, as a matter of law, that all independent contractor agreements are contracts of employment but instead are determined on a case-by-case consideration. Such a ruling by itself may not encourage misclassification, as this would merely leave the status quo undisturbed and as reported by the Bureau of Labor Statistics, the number of independent contractors has shrunk from 7.4% in 2005, to 6.9% in 2017.

It has been reported that during the oral hearings that Justices with both conservative and liberal leanings expressed a predisposition to side with the worker. Hopefully the Court will also balance the policy implications and consider the potentially huge costs to the American consumer in arriving at its decision.

Suggested citation: Nayanthika Ramakrishnan, Arguing Over Arbitrability of an Arbitration Agreement: New Prime v. Oliveira and Its Potential Impact on the Transportation Industry, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Oct. 26, 2018), https://live-journal-of-law-and-public-policy.pantheonsite.io/arguing-over-arbitrability-of-an-arbitration-agreement-new-prime-v-oliveira-and-its-potential-impact-on-the-transportation-industry/.